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Thursday, June 27, 2013

Interest rates on loans are increasing. Here I show you how even a small change in interest rates will cost you money. You WILL be shocked!!

The buying and selling of a house for most people is the biggest personal financial transaction they will undertake in a lifetime. Because most people have to borrow the money it takes to buy one, the interest rate paid on that borrowed money is of utmost importance.

In the last few weeks interest rates on loans to buy house have spiked upward. Only a couple of months ago someone with excellent credit could borrow money to purchase a house at close to 3.5% interest rate on a 30 year loan. Today, that rate is around 4.6%. I know this because we are in the process of selling a house and buying a new one and I was quoted 4.67% for a new loan.

That may not seem like much of a change, but it is deceiving and an easy trap to fall into when you are quoted an interest rate. Small differences matter!!

Below I used an online loan calculator to give you some examples of how changes in interest rates affect how much you pay back to the lender. For each scenario I assumed a loan for $200,000 for 30 years, a 2% total property tax rate (could be higher or lower depending on where you live) and home insurance of $1,000 (again, could be higher or lower).

The only thing I change is the interest rate for each loan. I use 3.5%, 4.5% and 5.5% respectively. I highlighted the change in the monthly payment and the TOTAL in interest payments you would make over the 30 year life of the loan.

See the difference every 1% change in the interest rate makes? Pardon the pun, but it is in your interest to seek the lowest interest rate you can on a loan of any sort. Higher interest rates means more money transferred to the lender and less for you to use for savings or present consumption.